CHRIS HAYES, MSNBC ANCHOR: Good morning from New York. I`m Chris Hayes. Four people were shot during a Mardi Gras celebration in New Orleans French Quarter last night. One person is in critical condition. The other three are in stable condition.

And a new U.S commander took the lead in Afghanistan this morning. This morning, General Joseph Dunford took over from Marine General John Allen.

Right now, my story of the week, how America kills. Over the last 17 months that we`ve been on air, we`ve talked quite a bit about the Obama administration`s secret program of targeted killing of suspected terrorists. A small number of those targeted and killed have been American citizens while some unconfirmed number of those killed in Yemen and Pakistan and elsewhere have been innocent civilians, mothers, children, young and old men in the wrong place at the wrong time. People in the administration have told reporters they have implemented an extremely rigorous screening process inside the White House to decide who ends up on that list. That the president himself approaches his responsibility to administer the program with solemnity and care and that the policy has been efficient and effective in decimating al Qaeda and other affiliate terrorist groups.

A senior U.S. official said as early as 2009, quote " The enemy is really, really struggling. These attacks have produced the broadest, deepest, and most rapid reduction in al Qaeda senior leadership we`ve seen in several years." But before any of the specifics of the program`s merits can be properly and fully debated, it has to be brought out from behind the veil of secrecy, which now cloaks it. That process started this week. My colleague Michael Isikoff obtained a heretofore secret Department of Justice memo that outlines the administration`s legal arguments for why it believes it has the authority to use legal force against "a U.S. citizen who is a senior operational leader of al Qaeda or an associated force" if "an informed high level official of the U.S. government has determined it`s appropriate." At Thursday`s confirmation hearings for his nomination to head up the CIA, White House Counterterrorism Advisor John Brennan widely reported to be the chief architect of the killer`s policy faced a series of questions about the memo and the program it helps justify.

(BEGIN VIDEO CLIP)

SEN. SAXBY CHAMBLISS, (R ), GEORGIA: Your view seems to be that even if we could save American lives by detaining more terrorists using only traditional techniques it would be better to kill them with a drone or let them go free rather than detain them. Could you explain the logic in that argument?

SEN. SUSAN COLLINS ( R ), MAINE: Is your testimony today that the huge increase in the number of lethal strikes has no connection to the change in the Obama administration`s detention policy?

SEN. RON WYDEN, (D) OREGON: Do you believe that the president should provide an individual American with the opportunity to surrender before killing them?

(END VIDEO CLIP)

HAYES: No topic that we discuss regularly on the show invites quite the level of backlash on social media as the kill list and drones. Given the constant and often disingenuous criticism and obstruction the president has faced. I can understand why liberals, Democrats and others might view with some cynicism, some of the outrage and indignation suddenly expressed by conservatives this week, much of which has been more focused on liberals` hypocrisy rather than the underlying policy.

I had to laugh myself when Rupert Murdoch tweeted the following this week. "How do liberals explain complaints about Guatemala with silence on drone killing civilians in all without arrests, trials, etc." He meant, I think Guantanamo, autocorrect gets the best of all us from time to time.

When us lefties here on "Up" have discussed and criticized the secret kill list program, many viewers who have responded online or through email accused me of being naive about the true nature of war or going out of my way to find things to criticize about the president or stoking controversy where there is none. And it is true, polls show the majorities of Democrats, Republicans and independents supports targeted killing and the drone strikes that often carry them out. Partly I think that`s due to the fact the public hasn`t been given much information about exactly how the administration has come to the conclusion it can carry out these killings, even against citizens and partly because the worst effects of the policy, the collateral damage or more accurately, the children as young as one year old who our weapons kill are almost entirely invisible to us.

But also, it seems possible to me, that even with the full accounting of the program, many, perhaps even a majority of Democrats, even self-described liberals might support the targeted killing policy for, I believe the same reason a blogger named Lou Siegel gave this week. He wrote, "Though this might sound like a Cold war liberal defending CIA-led coups and military interventions, I support President Obama`s drone attacks. And I admit that I`m a hypocrite. If a Republican administration were executing these practices I`d probably join the course to condemn them as unconstitutional, authoritarian or worse. But I trust the president`s judgment that the drones are a legitimate way to take out terrorists who would if they could kill thousands of Americans. He`s making a trade-off knowing that a successful massive terrorist attack against us would result in far greater damage to our democratic institutions."

I think that is probably the most honest defense of the program you will hear from liberals. They trust President Obama to wield broad lethal executive authority with care and prudence. And besides, it`s war. Would you rather, I`m often asked by supporters of the kill list, that we have boots on the ground -- big, expensive destructive, deadly, disastrous land invasion of countries like the Iraq war? Isn`t the move from wars like Iraq to surgical strikes in Yemen precisely the kind of change we were promised? This narrow choice between big violence and smaller violence shows, I think, just how fully we have all implicitly adopted the conceptual framework of the war on terror, how much George W. Bush advisors continue to set the terms of our thinking years after they`ve been displaced from office. Because that argument presupposes we are at war and must continue to be at war until an ill-defined enemy is vanquished. What, people ask, is the alternative to small war if not big war? And the answer no one ever seems to consider is no war. If the existence of people out in the world who actively working to kill Americans means we are still at war, then it seems to me we will be at war forever and we`ll surrender control over whether that`s the state we do in fact want to be in.

There is another alternative. We could be a nation that declares its war over, that declares itself at peace and goes about rigorously and energetically, using intelligence and diplomacy and well-resourced police work to protect us from future attacks. The Obama administration quite ostentatiously jettisoned in the phrase "War on Terror" from its rhetoric. But it`s preserved and further expended is fundamental logic and legal architecture. Even after the troops come home from Afghanistan, we will still be a nation of war. In 1832, German military theorist Carl von Clausewitz declared that war is an act of force. And there`s no logical limit to the application of that force. A clash of forces freely operating and obedient to no law but their own. Much in the history of war and the international law in the last century, particularly after horror of the Second World War, was an attempt to prove Clausewitz wrong. But we shouldn`t fool ourselves. We may find ourselves at some point facing a stark choice between the war we are now fighting and the law which we all at least pretend is the bedrock of our republic. I say we choose the law. We`ll see what my guests say right after this.

(COMMERCIAL BREAK)

HAYES: We`re discussing the legal architecture for the government`s assertion that it has the power to target and kill suspected terrorists, even those suspected terrorists are American citizens. And right now, I want to bring in Jennifer Daskal, adjunct law professor at Georgetown University, a fellow at the School Center of National Security and the Law, also a former counsel to the assistant attorney general for national security in the Obama Justice Department. Jeremy Scahill, writer and producer of the forthcoming book and feature-length documentary "Dirty Wars: the World is a Battlefield," which debuted at the Sundance Film -- Sundance Film Festival last month. Jeremy is also a national security correspondent for "The Nation" magazine. Hina Shamsi, director of the ACLU National Security Project and Richard Epstein, senior fellow at Stanford University, Hoover Institution, and the law professor at NYU. It`s great to have you all here.

RICHARD EPSTEIN, PROF., NYU SCHOOL OF LAW: Good to be here.

HAYES: So, maybe, I thought, maybe, Jeremy, you could talk a little bit about -you`ve been doing -- reporting on this for a long time and you and I have had conversations about this through your reporting. How the operators, the people that implement these policies, right, which is the kill list, basically, this program of targeted killing understand the legal regime they`re operating within, right? I mean where does the authority flow from who ultimately is making -- is calling -- making the shots and giving them assurances that what they`re doing is legal?

JEREMY SCAHILL, THENATION.COM: Right. I mean there are two basic ways that these operations are conducted. One is to do it through the Central Intelligence Agency and it could be a covert action as in the case of the bin Laden raid. But the bin Laden raid was not carried out by CIA operatives. It was carried out by a JSOC team, from what`s called the special missions unit, SEAL Team 6. The other way of doing it is that the military can conduct clandestine operations, which will eventually be owned by the president. The reason you have a covert action take place is if it goes wrong, then the U.S. can deny that it`s taking place. From my conversations with people inside the JSOC and CIA community, there`s a different set of understandings. I think there`s great consternation right now within that community about what they`ve been doing for the past decade. I was recently talking to a former member of SEAL Team 6 who was in Yemen for the last couple of years of his tour working on the high-value targeting program and I talked to him about the killing of Abdulrahman Awlaki, and he was there at the time.

HAYES: Abdulrahman Awlaki is a 16-year-old boy, who was the son of Anwar al-Awlaki.

SCAHILL: Yes.

HAYES: ... who was killed in the drone strike two weeks after his father was.

SCAHILL: Right. And some of what he told me, I can`t -- I can`t disclose because of agreements I made with him, but I will say that`s when I asked him what he thought about that operation, he said there`s a reason I`m not doing this anymore. And I think, you know, Stanley McChrystal who ran JSOC for much of the Iraq war and is often associated, even though he`s a social liberal, with being sort of a Cheney guy, McChrystal has come out and said that, you know, this is a counterproductive ...

HAYES: Right.

SCAHILL: ... policy because of the potential for blowback and the hatred that it inspires. So, I think that, you know, you asked what sounds like a simple question, but I think it has a complicated answer and it depends who you are talking to. But I think in general what`s happened in the past week, is that the story has broken out into the open and there`s a discourse happening now that wasn`t happening a week ago.

HAYES: So, I want to talk about how we should if, you know, that`s internally how the law`s understood and I think there`s -- that the White House has been very clear about we`re asserting this authority. We`re signing off on that, right? The buck stops here. When we look at this memo that we have now, that Michael Isikoff got his hands on, what, as someone who is not a lawyer, just a citizen, like what bodies of law pertain here? I mean you had to work on this internal to the administration, like how -- what is the check list for like, how many hurdles you have to jump over before you get to the point where there is a guy who is an American citizen that we`re going to target for summary execution without trial?

JENNIFER DASKAL, LAW PROF., GEORGETOWN UNIV.: So, just to be clear, I did not work on this particular issue.

HAYES: Yes. No. I know, right. And you probably couldn`t be here if you had.

DASKAL: Exactly. I think -- and I think this is one of the confusing and disturbing parts of the memo is that it refers to a bunch of different bodies of law and you talked at the beginning of the program about are we in a war. The memo asserts that it`s acting that these authorities are pursuant to law of war authorities ...

HAYES: Yes.

DASKAL: ... which provides one set of possible answers. It also makes a second assertion that these authorities are permissible under a self-defense framework that could continue to exist even if we get to the point where the law -- where the war ends, the conflict with al Qaeda ends. And to me that is a very potentially disturbing and expensive view of when the United States is permitted to use lethal force against a U.S. citizen.

HAYES: So, there is this division between -- I mean because it sites the authority use and military force, right, which is the AMF, that`s passed. Then there`s also this broad principle of self-defense, right, as an international law precept, which is if some country`s about to launch some horrific attack on you, you`re allowed to defend yourself, right? And that pertains even if you haven`t gotten to go to Congress to declare war. That`s just a general principle. And, Richard, you`ve argued basically that when we`re in this terrain, we`re almost kind of by necessity in a land that is sort of lawless and just dependent on judgment, prudence, and care.

EPSTEIN: Well, I wish it were otherwise, but think in the end it`s not. But the way, in which I approach the subjects, I first think about how it is you think of self-defense in connection with individual attacks by ordinary persons. And what happens is you start with a bold declaration of the thought, which is self-defense is always appropriate and then immediately you have to sort of hem it in with questions about good faith, excessive force, proportionality and the like, and those are single actors. When you go to nations, the information base is weaker. And the same kinds of difficulties arise. So, you could try to judicialize this in some particular sense, but at that point you just simply transfer the problem to somebody who doesn`t have operational responsibility. And one of the serious dangers that you run into is if you do that, that it gives deniability to the administrative people who set up the situation because you`re not going to have this as a, you know, as a trial. You`re going to have it as an ex-party one side is kind of proceeding. And I would rather have the administration on the hook for the whole thing.

And the second point on wants to make, following on what Jen said, is in dealing with this kind of thing, it seems to me that you really do have to worry about the fact that there is quote-unquote "a potential war". And at this particular point you can`t put down your guard, but on the other hand, what you have to do is basically dial down the frequency as it turns out things start to change. So, if you were looking at the al Qaeda-type situation, you vanquished them, I don`t think people want to have a change in general policy. But I do think you would want to have as a ramping back of a policy that you have on the grounds that you can`t cross the hurdle.

HAYES: The idea of perpetual war plays throughout the memo quite largely, right? Because it ends up ...

EPSTEIN: Sure.

HAYES: ... being a justification for a lot of things. Particularly there is this ...

EPSTEIN: ... and an excuse for some.

HAYES: An excuse for some. There`s -- the president talking to Mark Bowden in October (inaudible) said talked about creating a legal structure as part of the goal here. "I think creating a lethal structure processes with oversight checks as on how we use unmanned weapons is going to be a challenge for me and my successors for some time to come, partly because that technology may evolve fairly rapidly, and there`s a remoteness to it that makes it tempting too somehow think we can without any mess on our hands to solve our vexing problems." That gets to this question of what`s the bar for actually doing this stuff. So, I want to talk about that and I want to talk about the concept of imminence and how important that is and then whether we are at a perpetual war. What does that mean for the way we operate, as citizens, as a nation right after we take this break.

(COMMERCIAL BREAK)

HAYES: All right. Richard made this argument that I think is a really interesting one and also has intuitive appeal to people which is basically like when we`re in this universe of making these decisions about essentially battlefield considerations or, you know, there`s some training camp and are we going to strike it or not that you just have to essentially do this kind of balancing act of interest and just like approach it with prudence and care and have some kind of process internal to the administration but you cannot, in his words, judicialize it, right? Which is that -- this just can`t be the sort of thing you run through the courts for review and I want to hear your response to that.

HINA SHAMSI, ACLU: Well, there are a number of contested assumptions that we made in that argument, and I want to really pull it apart a little bit. So, first of all, we should talk about what exactly the legal standards are, and the law is clear. Under international law, self-defense answers the question of when one state can violate the sovereignty of another state by using force in their territory. It doesn`t answer the question of whether the use of lethal force against a particular person is lawful. Those answers come out of the context of armed conflict from law that says you can target people if they pose a specific concrete and imminent threat and that makes sense. You don`t need judicial review when those conditions are met. In the context of armed conflict when someone is directly participating in hostilities. And what`s so disturbing about this white paper, is that it completely confuses those standards. We seem to be accepting the conclusion that a person is -- and someone who can be targeted and making the policy conclusion that we want to be able to kill them and then from that conclusion ...

HAYES: Reversed ...

SHAMSI: ... picking and choosing the different kinds of standards that might apply.

SCAHILL: I think one of the most disturbing aspects of this is that we really seem to have entered the age of pre-crime where people are -- patterns of life are studied. If you`re a military aged male in a certain region of Yemen, the White House is essentially asserting that these people are terrorists and that we can kill them, and to me that is -- that`s an incredibly dangerous threshold to have crossed. I mean redefining imminent in the way that the White paper did where it`s sort of like, may be possibly at some point in the future this person would pose a direct threat to the United States, that combined with the so-called signature strikes is really a disturbing aspect of that.

EPSTEIN: May I comment on that?

HAYES: Please, yes.

EPSTEIN: I think the mistake that the memo made was to insist that imminence was the test and then to define it out of recognition. I think the appropriate thing to do is to ask the question about this precrime stuff, and the criminal law`s more complicated on that. We not only have a law of murder, we also have a law of aiding and abetting, we also have a law of, you know, conspiracy to commit murder and all of those things are subject to punishment. And under these circumstances if these kinds are engaged in full-time conspiracy, it is certain that they could be prosecuted for that if we send out the call and say, hey, come on home and be prosecuted to the United States. They`re going to flee at that point and become outlaws, at which point the nature of the game goes (ph). So I don`t think you`d ever want to defend a position that any able-body man in Yemen counts as a terrorist because he`s in the wrong country, but when you have a program in effect for many years, I`ve seen one instance of abuse, which is truly regrettable if you`re killing a 16-year-old kid. But I don`t think that`s sufficient to condemn an entire program. I think you have to look at the overall error rates taking into account, both successes and failures.

HAYES: Well, let me just make -- follow up on that, which is that part of the problem here is we -- I just -- it`s very unclear what the error rate is, right? I mean all of this is shrouded in secrecy. What even counts as an error, right? The -- but Jeremy referred to the signature strike, which is defining civilians in this way that has a lot of latitude, right?. If you get a military age man in the strike it`s by definition not a civilian. So, we just don`t know as an empirical matter, right?

(CROSSTALK)

SHAMSI: -- not only do we not know as an empirical matter, but this white paper is recognizing apparently limitations that the administration thinks apply to citizens, right? So that seems to be the citizen level.

HAYES: Right.

SHAMSI: We have no idea what standards it is applying to non-citizens, and, of course, there are to our knowledge there are four citizens who have died under the targeted killing program to date. Meanwhile there are approximately 4,000 people who have died. And what we have are assertions that the right people are being killed, but in response to credible allegations that hundreds of civilians have died, silence.

Yeah.

DASKAL: And I just want to -- I just want to respond to something Jeremy said earlier because I think this goes back to the importance of deciding what legal frame we are operating under. If we`re operating under a war construct, if you can -- and there`s a huge questions about who qualifies as an enemy under the law and when that war ends, it`s a debate that we need to have, it`s a debate that, I believe, the administration at least hinted that they started to think about through a speech that was made back in November by the former general council to the Department of Defense. That`s a huge and important and critical question, and in war, killing is permissible. It`s not -- this is not torture. Torture`s impermissible in all contexts, without a doubt, in every situation. Killing is permitted in war. And the question is what do we do in this new kind of conflict ...

HAYES: Right.

DASKAL: ... in a situation when we`re not talking about battlefield killings, we are also, to honest, not talking about killing somebody in the streets of Michigan. We`re talking about potentially killing some ...

HAYES: Well, not yet, anyway.

(CROSSTALK)

EPSTEIN: No, no, I mean as long as you have custody -- or ability to get custody over people, nobody`s in favor of this. And I -- I think ...

(CROSSTALK)

HAYES: No, wait a second, wait a second, wait a second. You can imagine, you can imagine, and, you know, an al Qaeda cell that was in the wilds of Utah hold up in a compound, right, in which the balancing test. Remember, the balancing interest here is can you capture them, right? And is it -- is there going to be undue harm? Like will it be too hard, right? You can imagine a scenario, in which the test that is laid out in the White paper leads you the conclusion that under that balancing test you just strike the compound.

(CROSSTALK)

DASKAL: I think ...

EPSTEIN: If you want to attack -- you want to attack -- you want to attack the test. But before you start to say that these things are likely to happen, if you had a program like this going on ...

HAYES: No, I didn`t say ....

EPSTEIN: Well, even if improbable. But when you are talking about operational programs, the key thing to do is not to worry as much about imagining, but to worry about demonstrated illustrations of abuse and there have been some and then the question you ask is whether or not the administration is trying to take something ...

SCAHILL: But it`s -- and to quote John Brennan -- I`m not a lawyer. But ...

EPSTEIN: I am.

(LAUGHTER)

SCAHILL: But, you know, Brennan said I`m not a lawyer and then said everything we`re doing is perfectly legal except when he was asked about torture. Then he said I`m not a lawyer. But -- but I want any lawyer at the table here and there are a few of them here, to tell me that signature strikes are perfectly legal. The idea that you can say that a particular region of a country is known to have terrorists though there`s no indictments against anyone, that nothing has been presented in the court of law, and you say that military aged males that are in that area constitute legitimate targets because maybe they are involved.

EPSTEIN: I would reject that. Categorically.

SCAHILL: Because that`s my response to you, too, because that is what this administration has asserted. For years that`s what all of the leaks from senior officials, that`s we`re talking about here. We`re talking about pre-crime. And it`s - and there are cases, there are documented cases of missile strikes. Drones are one part of it here.

HAYES: Right.

SCAHILL: AC-130s, cruise missiles. This administration is using the full gamut of force, where huge numbers of civilians have been killed and pursued of one person who may or may not be involved with al Qaeda.

EPSTEIN: I think.

HAYES: Hold that thought. Hold up. I`m going to take a quick break. We`ll continue when we come back.

(COMMERCIAL BREAK)

HAYES: Just to get a sense of the numbers here. And these are just drone strikes, right? So we should always be clear that drone strikes are part of the ways, in which targeted killing happen. It can happen through cruise missiles, it can happen through JSOC strike teams. This is CIA and U.S. covert drone strikes, by country. 2004 through 2013 in Pakistan, around 363 strikes. In Yemen, between 42 and 52. In Somalia, 10 to 23 and there are others in other parts of the world.

Now, reported civilian deaths, and again, this gets to this error rate question, which you brought up. I think from just -- having nothing to do with the law, right, just our moral intuitions as citizens, like the error rate matters, right? If the error rate is 90 percent then it seems absolutely unacceptable. If the error rate is one tenth of one percent, then maybe it is acceptable, right? But actually, what the implementation looks like, in terms of who is dying seems to me very important and we just don`t have incredibly good numbers on this. But reported civilian deaths from CIA and U.S. covert drone strikes in Pakistan, between 473 and 893. In Yemen, between 72 and 178. In Somalia between 11 and 57. Those are wide bands, but, again, this is a difficult thing to pin down.

DASKAL: There`s two types of error rates that are important. One, are we getting the right target, and, two, who are the civilian casualties?

HAYES: Right. Right. Right. Because in some cases, we just might -- just completely get it wrong, right? And then in some cases we might "get it right", which is strike someone we are trying to strike, but we also get a wedding party that is -- happens to be in the house next door, right?

DASKAL: Right.

SHAMSI: So, but going back to this issue of how we are -- that goes to as how we`re defining the people who we can kill, right? And so, what you have happen here, is at least with respect to American citizens, what appear to be language of limitations, you know, imminence, feasibility of capture. As you read this White paper, you realize that those terms are redefined in such a way that they`re vague, elastic, and robbed of their plain meaning. So, take imminence, for example.

HAYES: Let me read the portion of a white paper on imminence. "The threat posed by al Qaeda and its associative forces demands a broader concept of imminence in judging when a person continually planning terror attacks, presents an immanent threat, making use of force appropriate. In this context, imminence must incorporate considerations of the relevant window of opportunity, the possibility of reducing collateral damage to civilians, and the likelihood of heading off future disastrous attacks on America. Thus, a decision maker determining whether an al Qaeda operation leader presents an imminent threat of violent take against the United States must take into account that certain members of al Qaeda are continually plotting attacks against the United States." And basically says that the continually plotting of it means that imminence doesn`t mean -- the imminence that we used to think of, but this sort of broad sense in which you`re just out there, right?

SHAMSI: And the memo, the White paper expands on that and says, imminence doesn`t require clear evidence. And remember, this is a high-level official, which is one of the things that`s so chilling. A high-level official doesn`t need to have clear evidence of an actual plot that`s about to take place and it could happen at any time in the future. Now, we`ve defined a way what the standard is, but I think one of the critical things to realize is what this memo, the White paper and the memo its based on, appear to do, is to allow the killing of at least citizens who don`t truly pose an imminent threat, far from any battlefield and without judicial review either before the fact of after the fact.

HAYES: Should we -- how much should we care that it`s citizens? I mean how ...

EPSTEIN: I don`t think you should care. I mean the interesting thing is if you look at the major two guarantees with respect to this one on due process and one on habeas corpus, there`s no distinction between citizens and aliens. And that`s true with the ordinary criminal process. The key areas of distinction involve very different issues. Rights to have occupational preferences is given to citizens, but not given to aliens, right to buy and acquire property given to citizens and not to aliens, but if you want to punish somebody criminally or confiscate their property, the rules are identical. And that doesn`t mean -- doesn`t tell you whether you ratchet up foreigners up to the domestic standard, or you lower the domestic standards to the foreign standard ....

HAYES: Right.

EPSTEIN: But it just insists on parity.

SHAMSI: You know, I agree. The substance of law is the same. It protects everyone the same. The reason that we`re talking about citizenship here is because it is clear that citizens have a right to the courthouse, that they can get into the courtroom door where it`s less clear with non-citizens.

EPSTEIN: I don`t think ....

SHAMSI: And where ....

EPSTEIN: I think non-citizens have a right to do this as well.

SHAMSI: Listen, I completely agree with you. Unfortunately the courts haven`t. So ...

EPSTEIN: No, I mean that`s their problem. They`re wrong.

(LAUGHTER)

EPSTEIN: They`re fully wrong on that.

DASKAL: Let` get back a little bit - and I don`t mean to be repeating myself, but this gets back to the question are we in an armed conflict or are we not, because it`s clear in an armed conflict, the United States does not have to -- when the United States bombs units in Germany, that have U.S. civilians, they do not have to provide access to the courts ...

HAYES: Right. Right.

DASKAL: ... for those individuals (inaudible), but here`s where I think the imminence definition in the white paper is really disturbing. There`s two types of imminence. The imminence is used for two different purposes in the memos.. It`s used as a substantive criteria and it`s also used to water down any procedural -- in the procedural due process analysis in terms of what rights are due. And here we know, as you said at the beginning, we know that these decisions are made with great care, with great deliberation, and a painstaking process. Any situation where there is no imminence of any sort ...

HAYES: Right. Right.

DASKAL: ... and in such a system, there is room to build in many more procedural guarantees both for citizens and for non-citizens whether required to do by law or not.

SCAHILL: I think just because they say that there`s all this care being taken, I don`t believe that. I mean that the argument that`s sort of emerging that you talked about that Lou (ph) guy, his thing about, well, I would probably be up in arms about this if a Republican was doing it, but because -- it`s like partisan Stockholm syndrome or something. I mean it`s really like -- I mean are these people serious? Are they listening to their own words? You`re saying this particular president, I want him to run an unaccountable kill program, but if it`s the Republicans, I don`t want to. I mean your principles are defined. When someone you actually like is in power ...

HAYES: Right.

SCAHILL: And you`re willing to confront what they say. Not when someone ...

EPSTEIN: But nobody, I think, would disagree ...

SHAMSI: And ...--

HAYES: Hold on one second. Because I want to talk about what the big response to that is like what`s the alternative question, right? Any time you critique the drone program, people that you end up and you say, what are you going to do about Awlaki? Right? What are you going to do? There is someone there plotting in Yemen, and I want to look at that question from the legal standpoint, also a policy standpoint when we take -- a come back.

EPSTEIN: You can take them out.

(COMMERCIAL BREAK)

HAYES: So let`s assume that Anwar al Awlaki who is the -- was presumably what precipitated this. The memo that the white paper is based on, it couldn`t have precipitated, the white paper as a white paper , is written after Awlaki`s killed. We hope they`re actually writing the memos before the strikes are happening. Let`s say that Anwar Awlaki is really operationally involved, actively operationally involved in a remote area of Yemen where he is doing things that are, you know, we know his interactions Abdulmutallab, who is the Christmas Day bomber. He`s, you know, coordinating logistics for a strike on America, he does pose a threat. What so -- if the targeted killing program is wrong and we shouldn`t be doing it. It`s not either not legal or not wise strategically or not morally justified, well, then, what, Jen is the option?

DASKAL: Well, I think the second prong in the memo is key. There needs to be a serious and deep inquiry into the feasibility of capture, and that has to be the number one choice in every situation in these type of contexts, no matter what -- if it`s -- again, I go back to the -- if this is an armed conflict, I don`t think it`s as hard of a question. If he`s an operational leader of a group that the United States is engaged in an armed conflict with and there`s evidence, information that he is engaging in ongoing attacks -- ongoing attacks, and capture is not feasible, I don`t think it`s as hard of a question. If that information is not accurate, and we`re talking about operating in a self-defense rubric, I think that there needs to be extremely high demanding standards for determining that there is an imminent threat.

HAYES: But part of the problem is that all of those standards are going to be internal to the executive.

SHAMSI: That is part of the problem, and one of the things that we`re assuming here is partly what`s contested. And look. If the government has made serious allegations against Anwar al-Awlaki. And I`m not going to minimize the seriousness of these allegations, but there is a difference between allegations and evidence. It never charged him with a crime. Throughout a long period of time. And the reason the courts exist are to distinguish between allegations and evidence. The government ...

HAYES: Right. But in a war framework that`s not the case. I mean you just don`t have to ....

SHAMSI: But it`s a war ...

(CROSSTALK)

HAYES: I`ll read to you the authorization for the use of military force. "The president is authorized to use all necessary and appropriate force against those nations, organizations or persons he determined planned, authorized, committed or aided the terrorist act that occurred at September 11, 2001, or harbored such organizations or persons in order to prevent any act -- any future acts of international terrorism against the United States by such nations, organizations or persons." I mean and it`s cited in (inaudible). We`re at war.

EPSTEIN: Yes.

SHAMSI: And that`s -well, that was written for the post 9/11 to authorize the war against Afghanistan, right?

EPSTEIN: No. It`s much more general than that.

SHAMSI: The issue here is that we have undefined associated forces, we have undefined senior operational leader of al Qaeda, and those are hotly contested issues. We`re saying and we`ve said in our lawsuit against the government that at the time that Anwar al-Awlaki, Samir Khan and Abdulrahman Awlaki were killed, there was no armed conflict in Yemen, and the government, instead of saying here are all the reasons why, they`re saying we don`t think that the court should look at this at all.

SCAHILL: Right.

HAYES: But the government`s response, it`s just to be clear, the government`s response to your lawsuit has been to assert state secrets, basically.

EPSTEIN: Yes.

SHAMSI: Not yet state secret. They have said that the courts have no role ...

HAYES: That`s the question, I`m sorry. Yes.

SHAMSI: ... in assuming that this is an armed conflict.

DASKAL: And this is ...

(CROSSTALK)

EPSTEIN: But I don`t think you could possibly make the claim that there isn`t an armed conflict going on given the kinds of threats that are involved. I mean it seems to me that the remarks that you made at the outset if we unilaterally declare peace, the other side will follow. And nothing like that is going to happen.

HAYES: No, I didn`t say that.

EPSTEIN: And I mean -- or that we take diligent work. You have to be extremely proactive. I do think that this is not a judicial question whether it is an armed conflict. There`s a real political question there. But I think on that one, Hina`s wrong. I mean that`s what`s going on in this case, and I think it`s pretty ugly, and I think we`re entitled to take some defense. I don`t think, in effect, that what we should do is to tolerate politically if the president goes after somebody who`s not connected with this thing. And then kind of smuggles that in here. So it is a huge public check and I want her to denounce him at every possible opportunity....

(CROSSTALK)

HAYES: But there`s not a public check in the sense that we don`t know what`s going on.

(LAUGHTER)

DASKAL: I think that`s the critical point. Hina said there needs to be much, much greater transparency. There needs to be a much greater accounting of the legal criteria, the fact that it took so long for this white paper to come out, which is not classified, which doesn`t have any classified information ...

EPSTEIN: That`s right.

DASKAL: ... that lays out the purported legal justification for engaging in these types of strikes, -- these types of strikes, is unjustifiable and there needs to be a public debate and a debate with the international partners about what the laws are, which I think is highly contested, but more importantly what the laws should be and what the policies should be.

SHAMSI: Which should bring us to the Brennan nomination, right? Because here we`re talking about transparency and secrecy. This white paper came out on the eve of the confirmation hearing, which I think shows you just how contested this is, that it is now ...

HAYES: Right.

SHAMSI: ... becoming an issue for Republicans and Democrats alike. And John Brennan said something that was -- he said, he wants to optimize transparency and optimize secrecy ...

HAYES: Right.

SHAMSI: ... and that Orwellian word soup ...

HAYES: Right.

SHAMSI: ... is hard to understand except what`s happened here is we don`t have all of the legal memos, the public doesn`t have the legal memos, in Senator Ron Wyden`s words, when the government claimed that it can kill Americans and should be broader than Americans, we should know that authority.

HAYES: Right.

SHAMSI: ... summary for the argument is no substitute for the argument itself.

HAYES: Right. And there`s no way, I think that you could defend keeping the legal rationale secret.

EPSTEIN: That is true.

HAYES: That has to be in a public ...

EPSTEIN: But let me put the kind word for Brennan, at least one. When he is saying, "optimize secrecy" and "optimize transparency", those are the wrong words. What he should have said, we have to balance the trade-off and ask the question, whenever there`s a public disclosure that`s going to hamper the effort to try to chase after people. That`s a much more defensible way of doing it. I`d rather attack him for what he should have said rather for what he did said.

SCAHILL: I think it was a kabuki oversight. This what happened at the Senate. I don`t think the relevant questions were asked. More importantly, the follow-up was just weak sauce. I mean there was almost no follow-up on some of these core questions. And we`re talking about the most fundamental rights that we have in our society and I think that Congress should shoulder a lot of the blame for this ...

HAYES: YES.

SCAHILL: And I`m sorry. You can`t -- you can`t, you know, conduct foreign policy declarations by leaking things to the media. That can`t be your oversight.

HAYES: Right.

SCAHILL: There has to be -- There has to be something else here.

HAYES: Jennifer Daskal from Georgetown University, Jeremy Scahill, author of "Dirty Wars", which you are absolutely going to want to read the day that it`s out, Hina Shamsi from the ACLU and Richard Epstein from Stanford University`s Hoover Institution. Thanks, that was a really good conversation.

EPSTEIN: Thank you.

SHAMSI: Thank you.

HAYES: Nobel Prize winning economist and "New York Times" columnist Paul Krugman joins us with what he wants to hear in the president`s State of the Union address after this.

(COMMERCIAL BREAK)

HAYES: This week ahead of the president`s State of the Union address on Tuesday the White House began laying the groundwork for yet another deal to temporarily stave off the looming sequester, a series of automatic spending cuts to discretionary programs in the Pentagon scheduled to take effect in March unless Congress can agree on a broader deficit reduction package. President Obama said that if Congress fails to agree on such a package as seems likely he wants to delay the cuts to give lawmakers even more time to hand route a deal.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES OF AMERICA: If Congress can`t act immediately on a bigger package, if they can`t get a bigger package done by the time the sequester is scheduled to go into effect, then I believe that they should at least pass a smaller package of spending cuts and tax reforms that would delay the economically damaging effects of the sequester for a few more months until Congress finds a way to replace these cuts with a smarter solution.

(END VIDEO CLIP)

HAYES: On the same day the president spoke, the Congressional Budget Office issued its update to fiscal outlook for the next decade and confirmed what a vast body of empirical evidence has already told us. Austerity has been a considerable drag on economic growth. The CBO concluded in its reports that, quote, GDP will grow slowly in 2013 because of the fiscal tightening by the federal government that is scheduled to occur under current law." In fact, without that fiscal tightening, GDP growth would probably improve by about 1.5 percent, according to the CBO. CBO also projects that economic output will remain lower than its potential until at least 2017 making a full decade of lost economic growth from a financial crash. So with the sequester looming we find ourselves at a critical moment in the unfolding story of the recovery, and as you follow the various political developments in storyline, you`ll notice that one voice in particular is likely to stand out above the rest. That of Nobel Prize-winning economist and "New York Times" columnist Paul Krugman. There is perhaps no other figure more influential or more widely sided on the center left than Mr. Krugman. His book now out in paper book "End This Depression Now!" lays out in full his case for more government spending to get the economy growing. That`s my pleasure to have Paul Krugman with me here at the table. Hi there. Thanks for coming in.

What do you want to hear in the State of the Union on Tuesday?

PAUL KRUGMAN, ECONOMIST, NEW YORK TIMES COLUMNIST: Well, what I`d like to hear, I`m not going to hear it. I`d like to hear a full -- a full throated endorsement of more stimulus ...

HAYES: You would like to -- read from your book, basically.

KRUGMAN: Right. Mostly what I hope not to hear, it`s -- but, you know we shouldn`t be doing any of this. This whole business with the sequester, all of this is -- this is not the time for any of this and the less he says about the deficit, the better. I mean I was really gratified by the second inaugural, because he said almost nothing about the deficit. He finally broke out of that, Beltway obsession with the deficit, so if he talks about other things, you know, the middle class, inequality, climate, and not about well, we need to balance the budget, that`s what I`m mostly hoping for.

HAYES: It`s funny that you said that the Beltway obsession. One of things I think is interesting about reading your column, is, at one level you`re as inside as it gets. I mean you won the Nobel Prize, you`re an extremely highly respected economist, you`re on "The New York Times" op-ed page, right?

KRUGMAN: Right.

HAYES: There is not -- you`re not some scrappy outsider, and yet your posture is very much as an outsider and you`re very critical of what, you know, the very serious people or the Beltway and I just wonder like how do you -- do you think about your relationship to what is the inside and yourself on the outside and how you kind of preserve that distance?

KRUGMAN: Well, part of is actually just preserving the distance literally. I mean I`m not in D.C You know, I`m mostly working in central New Jersey, right? And so, not being part of that circuit. But it`s also coming at it from, you know -- I`m still at some level a professor who`s moonlighting in this opinion business. And a bit -- it`s a very insular culture in Washington. It`s one -- of people who are hanging out together, who talk to each other, who don`t listen. You know, what`s odd about my position on this stuff is I am for the most part not doing any kind of odd unorthodox economics. I`m doing macroeconomics 101, but that is not what people in D.C hear. It`s not just that they don`t except it. For the most part, they haven`t even heard about it. This notion -- or maybe -- maybe the budget deficit is not a problem when the economy is depressed. It`s barely in the Washington discourse and because I`m still in touch with macroeconomics 101, I`m really sort of out of it.

HAYES: Why is there that distance? I mean this is something I think that`s interesting is that, you know, people that are like -- like yourself that are making the case for ...

KRUGMAN: Right.

HAYES: ... a kind of macroeconomics, Keynesian 101,demand, stimulus, things like that, you know, have been relegated to the margins of the very serious people debate in the Beltway, and then it becomes this political question ultimately, right? The kind of policy question is fairly clear, at least from where you stand and from where I stand, so then why is there the gap between macroeconomics 101 and what policy makers in Washington talk about?

KRUGMAN: I think there is two -- two things going on. One of which -- both of which are odd and disturbing. But one is sort of grand and one is sort of petty. In some ways the petty may be more important. So, the grand thing is, Washington has been dominated for 30 years by a right-wing establishment, whose goal is very much to cut back on -- you know, roll back the great society and the new deal, roll back Social Security, Medicare and Medicaid, and from their point of view all of this, you know, this crisis is an opportunity. They see -- they see big deficits. This is an opportunity to real against deficits and of course what you must do, therefore, is cut Social Security benefits 20 years from now, for some reason to deal with the current deficit and so that`s a big part of it. And that influences the debate. But the other thing is, there are a lot of people in D.C who posture, whose persona is that of being serious and you show that you`re serious by being willing to impose suffering, by being willing to impose cuts. The idea that actually the serious thing to do right now is spend is very, very against that persona. And so, they don`t - they don`t -- I think they just find it hard to even wrap their minds around the notion that the opposite of what they usually call for is what you need to do right now.

HAYES: And I think that`s particularly true in the case after financial crises. In your earlier book "Return of Depression Economics" you talk about the idea that there`s a sense -- deep intuitive moral sense in which people feel that you need to pay penance, right?

KRUGMAN: Right.

HAYES: Right. When there`s a crisis, there`s been sin, and there`s the only way to get out of sin is penance, and you have a great argument about that in the "Return of Depression Economics". I want to talk about that. I also want to talk about your role in the public debate right after we come back.

(COMMERCIAL BREAK)

HAYES: Good morning from New York. I`m Chris Hays here with Paul Krugman, author of "End This Depression Now," also a Nobel Prize winning economist and columnist for the New York Times. And I asked you a question about after crises, there`s this desire for penance.

KRUGMAN: Yes, it`s - something bad has happened, and the natural inclination is to feel that must have been the result of excesses. Of course, it is usually the result of excesses by some people, but then the notion is we must all sacrifice, which doesn`t actually -- isn`t actually right. I mentioned how I didn`t like Obama`s first inaugural. He actually had a lot of that boilerplate about shared sacrifice, and when you`re experiencing a depression, you don`t need shared sacrifice. You need spending to get the economy moving.

And, sure, you can see how wrong it is if you think about this. A family which has overspent needs to tighten its belt, but it doesn`t as part of its belt tightening start by having one of the spouses quit his or her job. But when - in the economy, when you do belt tightening in the economy, it leads to mass unemployment, which is crazy.

HAYES: Bank of England did a study recently that our segment producer Sal Genteel (ph) found that I think is so fascinating. It talks about the -- it looked at all the countries in the world, and it evaluated the percent of country years spent in banking crises, and from 1950 to 1979, 0.9 percent of total country years are spent in banking crises, and from 1980 to 2010 almost 20 percent of total country years in the countries analyzed are spent in banking crises. What is going on?

KRUGMAN: It`s actually not much of a mystery. It`s liberalization. We had from 1950 to 1980 or actually from 1935 to 1980 roughly, we had a very tightly controlled banking system in just about every country because the Great Depression was right there in people`s memories, the great bank runs. We had strong constraints on international movement of capital, so it was in many ways it was an inefficient system, it was hard to get a loan, money couldn`t flow too high, but it was a safe system. And then we said, well, you know, we`ve learned to manage these things, let`s open it up, and actually since 1980 it`s been one crisis after another. Latin American debt crisis, savings and loan crisis, Asian financial crisis, and then of course the big kahuna, which is the crisis we`re still dealing with.

HAYES: Is there a way of conceiving of a solution to that that is not just going back to what we had during the New Deal, or is that the solution? Like is there some way to combine the insights of the policy revolution that happened in the New Deal with the policy revolution that happens through neo-liberalism to create some sort of third phase that gets the best of both of them, or is it just the things we learned in the New Deal, we need to relearn?

KRUGMAN: Mostly, I think we need to relearn. Now, we did things that weren`t necessary. We probably had too much. The regulation cue that limited the interest on savings accounts was probably too restrictive. You know -- and in some ways you can`t go back. We`re never going to go back to a bank as a big marble building with a row of tellers. The world is just too complicated. But a lot of people have looked like -- this is my home field, international capital movement, right? And where`s the sign that free movement of international capital is productive anywhere? There really is no evidence. People have looked and looked and they can`t find that it`s done anything, really, except increase the frequency of crises.

(CROSSTALK)

HAYES: In fact, some of the countries with the tightest capital controls are actually the ones that are the success stories, right?

KRUGMAN: That`s right. And the miracle of this crisis is a tiny country of Iceland, which has come out in part because they broke the rules and imposed temporary controls on capital, because that`s what you need to do. You need a curfew when you`re having riots, basically, and in this case it`s rioting bankers, so you need to stop them.

HAYES: I want to read you a quote from you talking about your influences as a New York Times columnist. I thought it was interesting. You said those who hold the position if they know how to use it effectively have a lot more influence on national debate than, say, most senators. Does anyone doubt the White House pays attention to what I write?

My question to you is I think that`s such an interesting -- they know how to use effectively. Do you know how to use it effectively?

KRUGMAN: By the way, that was in response to debunking these people who were saying, you should be a treasury secretary.

HAYES: Yes, people were - there was a little campaign for you to be treasury secretary. You were explaining why you would not want to be treasury secretary.

KRUGMAN: Let`s put it this way. In terms of actually getting your ideas into the debate, I think I do pretty well with that. I get the ideas out there. People do read. They do talk about it. Do I actually manage to influence policy? That`s a harder question, right. But does anybody is always the question. But no, I mean. Look, it`s a responsibility. You`ve got 800 words in the most valuable journalistic real estate on the planet. You`d better at least catch people`s attention with it, and I think I do manage to do that.

HAYES: We`re going to have this sequester debate, and we`re going to talk a little bit to the panel about that. And here`s what ends up happening, particularly in the era of the financial crisis. Economic issues have been front and center, and often economic issues that are fairly technical -- or if not technical, described in technical terms and kind of obscured. And what ends up happening it seems to me is people on different parts of the spectrum all have their proxies, right? So all the liberals I know read you, and I`ll even hear them cite arguments you make as economic arguments. It`s just proxyism, right? We trust you, we read you. And then Ed Prescott, who is a Nobel Prize winning conservative economist, he`ll appear in the Wall Street Journal editorial page. Or Greg Mankiw or someone else. And they`ll cite them. And my question to you is like, how should citizens who are not economists go about trying to adjudicate these disputes that`s one beat more sophisticated than just reading the person on your team?

KRUGMAN: Yeah. That`s a -- that`s a hard issue. I mean, in fact, what do I do on issues that are -- I don`t know the technical stuff. And I look for style. I look for people who seem to be actually looking at evidence. I look for people who`ve been willing on occasion to admit that they made a mistake in the past. I look for some sign that a person is actually seriously studying as opposed to just spouting a public line. But that`s, you know, I`ve talked about this. It`s -- there`s this issue that came up from the Madoff scandal of affinity fraud, where people believe somebody who seems like their kind of guy, and there`s a lot of that going on in public policy, where people listen to sources who are, you know -- if you actually believe what you read on the Wall Street Journal editorial page, you would have lost a lot of money over the years, but people still believe that because they seem like their kind of people.

HAYES: You talked about the willingness to admit their mistakes? What are the big mistakes? What have you been wrong about? What are the big things you have been wrong about in the last, say, 10 years?

KRUGMAN: The biggest was I was kind of expecting a deficit induced financial crisis in the early years around 2003, because the Bush administration -- not that they were just running deficits, but they were clearly so long-term irresponsible. They were pushing tax cuts long-term, not temporary stimulus, but long-term tax cuts, and I thought, gosh, the financial markets will punish us for that. I made two mistakes, which are now clear to me. One is a country like the United States gets a lot of slack. We`re just not treated the way Argentina gets treated.

HAYES: And you had spent a lot of time in your research work looking at countries like Argentina that don`t get the same amount of slack.

KRUGMAN: Right. And the other is that we`re a country that borrows in our own currency. And it`s actually remarkably hard to tell a story about a financial crisis of that kind when you borrow in your own currency. So I revised my views. The United States is a lot more robust to that sort of thing. But I was wrong. I was sounding an alarm that turned out to have been wrong circa 2003.

HAYES: And what`s the lesson from that? The lesson from that going forward is we shouldn`t worry about deficits as much . Do you take it to the next logical conclusion? We`ve had -- there`s a group of theorists who call themselves modern monetary theorists, and we had one of them on the program, and I follow a lot of their work, this idea that deficits, if you`re borrowing in your own currency, don`t matter at all, right?

KRUGMAN: The thing is, times are not always like this. There are times that the economy is more or less at full employment, then printing a lot of money is inflationary. Not now, but there are times when it is, and what the MMP (ph) guys, they and I have no -- jargon -- but we have no disagreement about what happens now. But they think that it`s always the way it is now. And I think no, actually, that depends on the conditions. And I become a lot more orthodox when the economy is closer to full employment.

HAYES: Do you consider yourself an orthodox economist?

KRUGMAN: I think I`m a pretty ordinary economist. I mean, most of this stuff, what is amazing is that I manage to sound radical and provocative while basically just going from Chapter 14 of a standard macroeconomics textbook.

HAYES: Does that say something about the way that economics -- I mean, what is your judgment of how the economics field has performed in the last ten years? You`ve been very harsh on the Beltway press and the sort of political media industrial complex. But your own field, how has it--

KRUGMAN: Yeah, we`ve been terrible, we`ve been terrible. People, a lot of the field, instead of talking, you know, you want authority. You want somebody to adjudicate. Instead, everybody, not everybody but many people went with their political prejudices. They just went --

HAYES: People say you do that. Right? I - every conservative I read is like you`re just a hatchet man for the left.

KRUGMAN: Yes, but you know, then read what I write, read the blog. Because I actually lay out the case. It`s not just the A-team (ph) liberal. I try to actually work (ph) it out, and I have been on the other side of these things in different circumstances. But no, the economic profession just generally. And people threw away a lot of knowledge. It was shocking in 2009 how many people didn`t know, you know, they were reinventing 1930s vintage fallacies thinking it was fresh thinking, because they just did not even know the history of their own profession.

HAYES: I want to talk to you about the great - one of the great mysteries of this recovery, one of the greatest mysteries, which is this divergence between profits and wages, that continued soaring profits and what the heck is going on, and whether this is the new normal, right after we take this break.

(COMMERCIAL BREAK)

HAYES: All right. Here with Paul Krugman. There`s two features of the recovery that I think are vexing, and particularly difficult to work out why they`re happening. One is this cash hoarding. You have March 2002, both corporate cash flow and capital investments were about $700 billion each. By March 2012, corporate cash flow was at $1.2 trillion. Capital investments were around $1 trillion, and overall corporations have about $1.9 trillion sitting on their balance sheet. Apple recently has had this bizarre kind of like crisis of having too much cash, where their shareholders are telling them you have all this cash, what is the deal? We don`t even know how to price this over a certain window of time. Why is there so much money sitting on the sidelines?

KRUGMAN: OK. So we don`t actually know the answer. One thing that is striking is if you think that it`s because companies are refusing to invest, that doesn`t really fit the facts. Business investment, corporate investment -- it`s not as strong as it was at the peak of the last boom and certainly not as strong as it was in the Clinton years, but it`s not that weak, either. It`s more or less, you know, so corporate investing.

(CROSSTALK)

KRUGMAN: But if the corporations are earning vast amounts of profits, and they don`t seem to want to invest it, is that probably because demand isn`t out there, but also they just seem to be sitting on this stuff, and it is -- but, you know, it`s kind of a -- you know, back in the early years of the last decade, Ben Bernanke gave a widely cited speech about the global savings glut, and - unfortunately he was sort of saying not to worry about the U.S. housing bubble, but the point is right. There is a global savings glut, and a lot of it is corporations are saving. It`s a lot of retained earnings just sitting there. Not quite sure why, except that maybe they`re just making so much money, they don`t know what to do with it.

HAYES: Well, and that brings us to this corporate profits mystery, which is corporate profits hitting a new high of 10 percent of GDP in 2012; employee compensation fell to a low of 43.5 percent of GDP in 2012. And this is one of the stories of recovery that I think is probably the most worrisome. Aside from its sluggishness or sort of unemployment is that, you know, we have, unlike Europe, we have reachieved growth. We`re in a recovery. But there`s this tremendous yawning chasm opening up between profits and wages. And it just seems to me that how long is that sustainable? At a certain point, right, in a consumption based economy, the profits come from selling things to people, and if people don`t have money from wages and they don`t have money from huge amounts of debt, where`s that money and why are we projecting out profits so far?

KRUGMAN: Well, it`s interesting. I mean, there`s a point of view. Some economists will tell you, well, the corporations are a veil, and ultimately those profits accrue to somebody, so investors must know that the money is there and so they`re going to spend. But actually, real life isn`t like that, and this does look like it`s a big source -- a sinkhole I`ve been using the phrase - a sinkhole for purchasing power. Corporations are accumulating. The profits, this profits story is relatively new. We`ve had soaring inequality since about 1980, but until about the year 2000, it was all about earnings. I mean, hedge fund managers and - but it was among people who were one way or the other collecting a paycheck. Since 2000, it`s been a redistribution from labor of all kinds to corporate profits. We don`t quite know what that`s about. It might be technology. Might be the rise of the robots. It might be increased monopoly power, some combination of the two, but it suddenly has become -- it`s almost as big a deal as the great recession itself, and it really transforms everything, and not in a good way.

HAYES: How do we think about what to do about it?

KRUGMAN: Well, one answer is, you know, a lot of what the business interests are campaigning for, is let`s cut corporate profits taxes. Cut corporate taxes. That should be -- actually maybe not. Maybe we should be raising them again, because this is a big source of our problems. We need to start thinking about paying for essential programs in part by taxing capital income, which, by the way, a little bit of Obamacare is, in fact, paid for by a special tax on investment income, which is a good thing, but we`re going to need to do more of that. But we might also want to think if this is market power, how about revitalizing anti-trust enforcement? That sort of went away in the 1980s, and that was probably a big mistake that we`re starting to pay for now.

HAYES: I want to talk about the sequester and the recovery and bring in some other folks to discuss it with you, and we`ll be back right after this.

(COMMERCIAL BREAK)

HAYES: Joining me now are Heather McGhee, vice president of the progressive think tank Demos. Dean Baker, author of "The End of Loser Liberalism: Making Markets Progressive," and co-director of the Center for Economic and Policy Research in Washington. And Alexis Goldstein, former vice president of information technology at Merrill Lynch and Deutschebank, now an Occupy Wall Street activist. And we still have Paul Krugman at the table. And I want to start off with the sequester, since that`s the big kind of defining story in Washington this week. Increasingly more attention is being paid to it. It`s unclear how much mention it`s going to get at the State of the Union on Tuesday. There are some signs that it won`t get a ton, actually, but it`s going to be the next big self-imposed crisis here.

And I was on the Lawrence O`Donnell show with Alex Wagner guest hosting Friday night, and Governor Howard Dean was making the case, he said we should have gone over the fiscal cliff and we should let the sequester happen. And his argument basically is, it`s so hard to bring the defense budget to heel, ever, that this is this one-shot opportunity. So here`s a look at how the projected spending, according to the Congressional Budget Office, looks. Major health care programs will rise from 5 percent of GDP to 6.2 percent of GDP. This is even with the sequester. Social Security will rise from 5 percent of GDP to 5.5 percent of GDP. Defense discretionary spending will fall a 40-year (ph) average of 4.7 percent of GDP to 2.8 percent of GDP. And so this is the best -- that chart, I think, is the best progressive case to let the sequester happen, and I`m curious what you guys think.

DEAN BAKER, AUTHOR: Chris, one thing to point out, and people in Washington do this all the time. You`re talking about a decade. As much as the people in Washington like to imagine that they`re actually making policy for 2023, they`re not. We are going to have another election in 2014, a new Congress, new president. We`re talking about what happens in March. And you know, look, I`d love to see it not go into place for the simple reason that`s going to slow growth and throw more people out of work. And I don`t really think that`s funny. So I`d love to see that not go into effect. But that doesn`t mean we see the next ten years of cuts. And I guarantee you, I`d offer you 100:1 odds, we will not see that, that`s utterly absurd, but that`s the way people debate things in Washington.

KRUGMAN: Yes, I mean, and first of all, it would be nice to have a plan to reduce defense spending. You know, people talk about waste, fraud, and abuse. There isn`t a whole lot of that in the U.S. government, except in defense, which is where there really is a lot, but you know, to have a plan to deal with that if we ever can is not the same thing as saying let`s slash it. You know, we`re right in the middle of a depressed economy. And so this is - you`re right (inaudible), 2023 is going to be President Santorum`s second term. Who knows.

(LAUGHTER)

(CROSSTALK)

HEATHER MCGHEE, DEMOS.ORG: I do think it`s important, though, to look at the projections just to see only how much the debate, particularly among the Democrats and the president, has fallen completely into the box of conservative economic orthodoxy. You`re looking at a place where 20 years out, we`re going to be spending more on debt payments than we will on non-defense discretionary. Under the president`s budget, we`re looking at a place where it`s going to be, what, 2.8 percent of GDP, 2.6 if the sequester goes into effect. And that`s just like sort of a strange number, what does that mean? Right now we`re spending 1 percent of GDP on veterans, we`re spending another 1 percent on anti-poverty and education. So think about the things that we think really need to happen, like universal child care. That`s another half a percent of GDP. Free college. That`s another third percent of GDP. So really we`re in a box under 3 percent--

MCGHEE: Seriously, I don`t know anyone who says that 10 and 20 years out, the working and middle class are going to need less from the federal government than they do now.

ALEXIS GOLDSTEIN, OCCUPY WALL STREET: And I think the thing I worry about this is what you mentioned at the very beginning of this, which is that this is a self-imposed crisis, and the only way that we can tackle defense spending is in a self-imposed crisis. We`re just playing into this larger narrative of we`re always in a shock. I mean, this is Naomi Klein`s whole point, the shock doctrine, and this is disaster capitalism. And what really worries me about this is Jack Lew, and how Obama is positioning Jack Lew to sort of -- it`s almost like an admission that we`re going to keep having this problem, so we need a budget guy, but what does that mean for financial reform? Are we going to leave it to the deputy, which we heard two suggestions which are not good for financial reform, a former CFO of Morgan Stanley and someone from the Walmart Foundation? That doesn`t make me as a pro-reform person feel very good.

HAYES: Yes, and I think this idea of perpetual crisis, which has been the kind of enduring theme since the mid-term elections in 2010 and the debt ceiling debacle, you know, I saw Timothy Geithner speak a few years ago where he said we`ve got to find some way to bind future policy makers, right? He was talking about this. And this has been this sort of weird project that everyone in Washington has been into, which is binding future versions of themselves, and then becoming the future version and then taking off the binding, and then coming up with some new idea to bind the future version of themselves, and I want to ask the question of like, can you legislate across time in any meaningful sense or should they just stop trying to do that? I want to hear your thoughts on that right after this break.

(COMMERCIAL BREAK)

HAYES: All right. So should legislators give up on this project they`ve been engaged in of trying to bind the future versions of themselves?

MCGHEE: I think what it represents, Chris, is this fundamental fear of the future and fear of democracy. Right? Both things I think are pretty great, actually. You`ve got the --

(CROSSTALK)

MCGHEE: What you have unfortunately is this sort of fault line in our democracy where you`ve got the deficit reduction imperative is really a preoccupation of the donor class. The wealthy are twice as likely to want to cut spending to reduce the deficit than the general public. The majority of Americans actually want direct public job creation, whereas that`s like terrifying to wealthy Americans. We talk about this in an explainer that we had on this issue. So if you think about, if democracy is working in 2018, and we are really at a point where there needs to be a whole new New Deal, but we`re still responsive to the Tea Party moment of 2010--

HAYES: Right. Then the sequester -- the Budget Control Act has been kicked down the road enough that we`re still trying to jump over it.

KRUGMAN: There`s such a thing -- to make the case for people I mostly don`t agree with, there`s something to be said for signaling well in advance if you`re going to be changing things. If you`re going to be raising the Social Security retirement age, you might want to be letting people know that well in advance. But that`s a very different, that`s a much weaker argument than the way it`s actually presented in Washington. They`re presenting it as these are real savings, and this is my pet peeve, that the nation is, well, 20 years down the road, we may not be able to afford to pay the benefits we`re now paying. So in order to avoid future cuts in benefits, we have to commit ourselves now to cutting future benefits, which is a complete nonsense argument. So no, and it`s really -- by and large it`s turning into a bad thing because we`re actually impairing the current business of government in an attempt to bind hypothetical future politicians.

BAKER: The other part of the story that`s just basically false is we`ve had this long history of out of control spending. You just go, where? You know, domestic discretionary is pretty much constant as share of the GDP. We deliberately raised it for the stimulus. That was temporary, that was deliberate, that`s because the economy collapsed. Employed people, good thing. Not enough, but you know, it went in the right direction. But, you know, apart from -- we`re getting older, so Social Security will cost more. We knew that for 40 years. Alan Simpson just discovered it when he was on the Simpson-Bowles commission, but the rest of us knew a long time ago. And the other part of course is health care. And that`s the story, fixing health care, and we`re just saying, in fact, one of the great stories that hasn`t gotten enough attention, lowered health care costs, CBO substantially lowered their budget projections because they`re assuming we`re going to see that in lower Medicare and Medicaid costs.

GOLDSTEIN: There isn`t this interest in facts, right? We`re all being moved to the right because of this donor class, because of the interests of the wealthy, and everyone else is just being told we have to starve the beast of the government and we have to cut social programs, and it`s just austerity forever, and that seems to be the only alternative that we see, certainly from the Republicans, but we also see this (ph) on the side of the Democrats.

HAYES: Partly that`s because, you know, it is this chicken and egg question about austerity, right? Which is that like it is -- I don`t think -- voters don`t want it, though some will say they want it, right? There`s this way in which people talk about the deficit, and it becomes a signifier for delocalized economic anxiety. It`s like I`m worried about the economy, I`m worried about the deficit. Those sort of run together.

But we are -- what`s remarkable to me is we actually are undergoing a lot of fiscal tightening, more than I realized, I think, because it got done in these little sequential ways. So here`s fiscal tightening across the world from the Institute for Fiscal Studies, OK? From least to most fiscal tightening as a percentage of GDP. Russia has been implementing Paul Krugman`s plan. They have been expanding. They`ve gone for fiscal expansion during this time. The United States has actually undergone a significant amount of austerity, already, right?

KRUGMAN: This was just for 2013.

HAYES: This is projected for this year. Right.

KRUGMAN: But if you look back across the last, you know, basically we started tightening at the beginning of 2010, and it`s been significant. If you look at purchases of goods and services, actual government buying stuff, it goes like this, and it`s back down to 2007 levels in the United States right now. And it`s sort of crept up on us. By the way, and that`s a demonstration. If you`re worried about out of control spending, there were all this, the stimulus will never be undone. Once you start spending, it never goes away. It went away with a vengeance.

MCGHEE: I think one of the elements here that we`re often not talking about in sort of the political valance of austerity is something that Lee Atwater knew very well, right? So there is this great 1984 quote, where he talks about how there were sort of three phases to the Southern strategy. First is opposition to the Voting Rights Act. The second is opposition to integration and forced bussing. And then he starts talking about how at the time -- this is `84 -- Ronald Reagan`s brand of fiscal conservatism would be the Southern strategy, because for many people, the idea of cutting government spending means cutting service, cutting investment, and cutting the public to a public that does not look like me. Actually, it does look like me, but does not look like the eye of the - does not look like the person that is being targeted with this speech. And so we have, it`s this great thing where he talks about you move from forced bussing to talking about things like cutting taxes and cutting spending, but you`re still talking about race.

GOLDSTEIN: And the great cruelty of that is in the wake of the financial crisis, we`ve seen minority households hit the worst. Pew came out with this study that said Hispanic households lost something like 60 percent of their wealth, and black households lost 53 percent of their wealth because of these predatory (inaudible).

BAKER: They actually focus much more on employment. I know that study well. I got really pissed at them, because the reality is the typical African-American household didn`t have any money before the crisis. So losing half of nothing really does not make that much of a difference. What matters much more is the African-American unemployment rate is about 13 percent.

GOLDSTEIN: But you did have a significant amount of people who owned their homes outright.

(CROSSTALK)

BAKER: -- there is no doubt about it, but I think the unemployment rate matters much more for the African-Americans than the loss of wealth.

KRUGMAN: I will say one thing. It`s not just this. I actually looked back in the 1930s. In 1936, the American public polling showed that they really wanted deficit reduction.

HAYES: And they got it in `37.

KRUGMAN: And it was a disaster, and it was a political disaster. So part of this is that politicians need to understand that governing by polls is actually a big mistake on economic policy, because economic policy has consequences, and even in political terms that can matter much more.

HAYES: And I will also say, you will notice that they walk up to cutting Medicare, but they never actually do it, right? The only thing, the only cuts have been on the payment side, but the Republicans want nothing more than to goad Democrats into cutting Medicare so they can run against them.

BAKER: And Obama was (inaudible).

HAYES: I want to talk about the role inequality is playing in the recovery. We had Joseph Stiglitz here last week and he made some comments on that. We`ll play that right when we get right back.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

JOSEPH STIGLITZ, ECONOMIST: What sustains in particular the American economy is consumption. And people on the top spend on consumption a smaller fraction than those at the bottom. So when you move money from the bottom and the middle to the top, overall spending gets constrained. And that weakens the economy. 2010, 93 percent of all the gains went to the top 1 percent. With that kind of recovery, not a surprise that we`re not going to have robust demand, and without robust demand, we`re not going to have a robust recovery. People invest when there`s a return, and if there`s no return, if there`s no demand, you can`t sell your goods.

(END VIDEO CLIP)

HAYES: That was another Nobel laureate. We`ve been racking them up recently. Joseph Stiglitz on the program last weekend, making this case about the way in which inequality is standing in the way of the recovery. You responded to his op-ed with some skepticism, and all the liberals I know felt like mommy and daddy were fighting.

(LAUGHTER)

HAYES: We were very sad. We didn`t know who to believe. So I wanted to get your thoughts on--

KRUGMAN: I realized afterward the title of the blog should have been, "I`ll do anything for Joe, but I won`t do that." It`s not a terribly important point, I think, because in a way, we`re advocating the same policies. But my argument is two things. One is that, you know, the fact that, yes, at any given moment in time, rich people save more of their income than poor people. But a lot of that is just delusions, because some of the people who are rich are temporarily rich. And so it`s not a - overtime we have gotten richer as a country, but savings rates have not gone up. And in particular, this is something Dean has talked about a lot, right now savings rates are higher than they were in the mid-2000s, when they were zero, but they`re actually still low by historical standards. It`s not as if we have people saving like crazy. I just have -- I have a hard time making that the story.

The corporate -- the corporate profits thing is a different story, because there`s money that is in fact disappearing into a sinkhole. But yeah. Dean has been arguing that excess saving is not our problem, and I sort of was picking up from him there.

BAKER: Actually, I take the middle position between my two favorite Nobelists here. I actually think Stiglitz was on to something in the sense that I look at kind of a sort of a sea change beginning in the `80s, where you know, we did start to see this upper redistribution of income, mostly wage income, a bit of profits in the `90s, you did see a rise in profit sharing. And Paul is absolutely right. It does not show up in the higher savings rate, but my argument is that we had a different regime, that what we had was the Fed lowered interest rates. You had people like Greenspan feeling comfortable lowering interest rates, because he wasn`t worried about wages rising. He`s saying, and he said this many, many times. So what they did, the way it ended up boosting the economy was boosting asset prices. We had the stock bubble in the `90s, we had the housing bubble in the last decade. That led to this wealth effect on consumption. So we did see the consumption, we did see low savings rate, in fact record low savings rate both in the late `90s, then even lower at the peak of the housing bubble, but that was driven by these bubbles.

So I actually think, you know, again, I don`t want to put words in Joe`s mouth. I don`t know if that`s what Stiglitz had in mind, but I do think there`s a story there.

HAYES: And the story of this recovery so far has been a sort of weird continuation and discontinuity, right, with those trends, which is that we have the inequalities there, we`ve got these record profits. We don`t have any replacing asset bubble, right? There`s nothing like the tech boom, and there`s nothing like housing, and so this is now kind of what - increasingly, it seems like this is what recovery or the normal is in the absence of the kind of injection of an asset bubble we had in the past.

GOLDSTEIN: But I do think it`s important to remember that sometimes inequality comes out of policy decisions, and I don`t think that we can let the administration off the hook for the way they handled the financial crisis. The best way to summarize it is banks got bailed out when we got sold out, but the technicalities of it are, listen, we were really easy on the banks, and then we took HAMP, which was sold to Congress as a way to stop foreclosures, and instead what we did is we slowed them, and it was another giveaway to the banks. And it was another way to make sure that they could get back up on their feet, but then they don`t lend out to the American public. And I think that`s going to be a big part of Obama`s legacy.

KRUGMAN: Yes, this is one thing that Obama bobbled, or Geithner bobbled on their own. HAMP, the mortgage relief program was a total bust. And it was a total bust, even though the money was there. They didn`t have a problem with having no funds. They just didn`t use it, because they were so afraid that someone would accuse them of having benefited some undeserving people and those people, right? The undeserving people who just happened not to be white, that they didn`t do much mortgage relief.

HAYES: But the question here is - let`s say -- I talked about HAMP a ton, and I totally agree with you. But the question is, is there a causal link between that aspect of the recovery and the shape of the distribution of the recovery now, right? Which is to say is it the case that because HAMP was handled the way it was, because we didn`t have principal write-downs and forgiveness for home owners and assisted them in the deleveraging, and banks did get assisted, that you can draw a direct cause between that policy and the shape of distribution of the economy.

BAKER: I think it`s very hard to say. I think we`d be in a very different world. Suppose we`d let the market run the course? Let`s imagine we had the free market fundamentals out there. Citigroup is out of business, Goldman Sachs is out of business, Morgan Stanley is out of business. I don`t know if any of the others would have survived. We would have had this tidal wave probably bringing down everything. We`d be in a very, very different world. Those people obviously would have a lot less money, but what does the world look like?

I mean, part of the story here, we should be jumping up and down. Of course, Paul is, yelling we have all these people unemployed. The first stimulus was when passed, we had 4.7 percent unemployment and Bush was in the White House. Here we are, sitting at 7.9 and everything`s fine. If we had let the dominos fall, we`d be in a very different world, and a lot of the people with money and power would be much less happy. So what does the world look like? Very hard to say.

KRUGMAN: Dean is right. One thing that`s very clear is that this rise in inequality changes the political economy. It means that the very serious people, they think it`s OK because nobody they know is hurting, right?

UNIDENITIFIED FEMALE: There`s distance.

HAYES: Right. And this, it`s remarkable how in some ways the story of the recovery keeps being jobs, jobs, jobs, is a problem, huge amount of joblessness, declining wages, declining or flat-lining personal income, and then Washington conversations drifting away from it and then having to be wrenched back and drifting away and then having to be wrenched back.

MCGHEE: Well, that`s what happens when you have really record economic inequality at a moment of a campaign finance regime where you are - it is - you can dollar for dollar translate that economic inequality into political inequality.

HAYES: What you should know for the news week ahead, coming up next.

(COMMERCIAL BREAK)

HAYES: In just a moment, what we should know -- what you should know for the news week ahead, but first, a quick update on the story we did last Sunday. When I discussed efforts by a number of New York politicians, (inaudible) city council members, mayoral candidates, state legislators, and members of Congress to pressure and in some case explicitly threaten Brooklyn College into canceling or formerly rescinding co-sponsorship event that would feature two speakers who advocate a campaign of boycott, divestment and sanctions against Israel. "Tablet" magazine criticized my initial commentary on the BBC movement for incidentally articulating the movement`s goals and visions. Any broad movement can be hard to comprehensively characterize, but it is true that the two speakers who appeared at Brooklyn College explicitly reject the foundational Zionist vision of a Jewish democratic state, and instead call for a single state on the entirety of the land between the River Jordan and the Mediterranean. Such a state would represent the demise of the Zionist project as envisioned by Theodor Herzl and formally recognized by the community of nations since 1948. And it is for that reason that Omar Barghouti and Judith Butler are viewed as toxic by those committed to Israel surviving as an explicitly Jewish state.

The day after I called on politicians to stop bullying Brooklyn College. "New York Times" editorial page echoed the sentiment writing, "We strongly defend the decision of the college`s president, Karen Gould, to proceed with the event despite withering criticism by opponents and threats by at least ten city council members to cut financing for the college. Such intimidation chills debate and makes a mockery of the ideals of academic freedom." The same day Gould issued an admirably unequivocal defense of the importance of economic freedom, and refused to order the cancellation of the event or the revocation of the political science department`s sponsorship. Then New York City Council assistant majority leader Lewis Fidler wrote a letter to Gould that basically explicitly threatened to cut the college`s public funding if it went forward with the event, saying, in part, "We do not believe this program is what the taxpayers of our city, many of whom feel targeted or demonized by this program, want their tax money to be spent on." The explicit threat alienated some local politicians, who then distanced themselves from Fidler, and Mayor Bloomberg denounced the threat.

(BEGIN VIDEO CLIP)

MAYOR MICHAEL BLOOMBERG, (I), NEW YORK CITY: If you want to go to a university where the government decides what kind of subjects are fit for discussion, I suggest you apply to a school in North Korea.

(END VIDEO CLIP)

HAYES: Strong words. On Thursday night, the event took place at Brooklyn College as scheduled. So, score one for academic freedom and the free exchange of ideas. All right.

So, what you should know for the week coming up, well, you should know that in the wake of the tragic suicide of Internet activist Aaron Swartz, members of the Congress are going to push for legislation to reform the law under which Aaron was prosecuted before his death. Congresswoman Zoe Lofgren will introduce Aaron`s Law, which would reform the sweeping Computer Fraud and Abuse Act in 1986, statute critics say lets government prosecute and threaten to prosecute all kinds of routine non-criminal Internet behavior. You should also know that what other politicians have expressed support for the law, including Oregon senator Ron Wyden, who spoke in a memorial for Aaron in D.C this week. The Department of Justice hasn`t come down one way or the other. The chairman of the House Judiciary Committee Bob Goodlatte has offered no word on whether the committee will consider it.

You should know nothing will change without sustained pressure.

And you should know that New York City Police Department is being sued by civil rights lawyers over its alleged practice of "widespread and intense surveillance of Muslims." You should know the Associated Press last year revealed that a division of the NYPD called the Demographics Unit infiltrated Muslim groups in the greater New York area including groups that organized outdoor trips and student events. You should know the law suit claims that in the practice of infiltration and surveillance violates rules the department itself agreed to in a settlement of earlier lawsuits that grew out of the department`s surveillance and monitoring of antiwar activists and other political dissidents. You should know the so-called Handschu Guidelines prohibit investigation of political or religious organizations unless there`s specific information connecting them to a past or present crime. You should know that in spite of this obvious violation, Mayor Michael Bloomberg has said the program will continue. You want to find out what my guests think we should know for the week coming up. And beginning with you, Heather McGhee?

MCGHEE: We should know the president`s State of the Union, and so, obviously the austerity lobby is gearing up to make sure that he continues on the path to national decline. And as Fix the Debt, which is one of the big corporate front groups for austerity does its big press conference, you should know that 22 of the companies in Fix the Debt spent more on lobbying last year than they did in paying taxes.

HAYES: That`s a good thing to know. Fix the Debt. And there`s been some really interesting reporting about how Fix the Debt has played this very key role in moving the conversation to austerity. Something that we have been talking about a lot.

UNIDENTIFIED MALE: I think that`s part of the Peterson machine.

HAYES: Right. Right. And part of the larger machine to move things up, and partly accounts for this explanatory gap between what voters say they want the people to talk about and what they say they care about and what Washington actually does. Dean Baker.

BAKER: Fix the Debt has been a valuable public service. And now, we don`t have to say it`s a conspiracy. It`s right in front of us.

(LAUGHTER)

BAKER: But anyhow, a couple of points. First of, you are talking about Aaron Swartz. I think it is worth noting. I mean I was kind of shocked, I knew him. I consider him a friend. He was facing decades in prison for trying to download academic articles and make them publicly available on the Internet. You can trust that the Justice Department was prepared to pursue this case. Not a single banker has gone to jail or even faced criminal prosecution for, you know, tens of billions of dollars that they were trying to lie in their pockets passing on tens of billions dollars of fraudulent loans. I think it`s quite a striking contrast. And Heather largely picked up on my ideas. I mean I think we have the State of the Union address, and, you know, to my mind, the real big question is, where is President Obama coming down? I mean a lot of people were happy with this inaugural address, in many ways it was progressive. But it was striking to me and quite painful, he didn`t say a word about jobs.

HAYES: Right.

BAKER: So, really, to my mind, the question here is how front and center are jobs as opposed to the deficit?

HAYES: Right.

BAKER: And I think we`re going to have a big indication of where he`s going in second term there.

HAYES: Alexis.

GOLDSTEIN: You should know that it`s not all doom and gloom. There are some interesting people, power of recovery is happening. And I just want to mention quickly two worker owned co-ops, one local here in New York, it`s called Occucopy, O, C, C, U, C, O, P, Y.

(CROSSTALK)

HAYES: That`s a real tongue twister.

GOLDSTEIN: Working on --

(CROSSTALK)

GOLDSTEIN: Right. Yeah. It is.

But there`s another one that people should know about called "The Working World." And they have sort of like a VC model, but it`s a social aim, not a profit aim. And what they do, is they see these worker owned co-ops with some money. And then when the co-ops start to make money, they pay back their initial investment and then they use that money to seat another workers co-op. It`s really exciting. They`ve done work in Argentina, in Nicaragua, in (inaudible). The workingworld.org, if you want to learn more.

HAYES: That`s super cool. Paul Krugman.

KRUGMAN: OK, well, you should know that Republicans are trying to present an alternative vision and failing. Which is pretty dramatic. I was fascinated by Eric Cantor, the majority leader`s speech last week. Which was a -- it was -- the format was exactly that of a State of the Union. It was like this is a Republican State of the Union. Supposed to be new ideas. And there were no new ideas in there. The only thing that was something new, was he called for an end to all federal financing of social science research.

(LAUGHTER)

KRUGMAN: So, the really important thing, they have new policy is to make sure we don`t know anything about what actually works.

(LAUGHTER)

HAYES: It`s really remarkable, actually. This has been something, and it`s something I think we want to cover. But it is a hidden story of this austerity era, particularly, what`s been done to research. And in fact, it`s actually broader than just the austerity or actual -- over a long period of time. And I have family members and friends who are engaged in all sorts of research, medical research. An uncle who is an amazing neurologist. Who -- all they talk about, it`s how much harder and harder and harder has become to get federal research dollars to do just basic research. And listen -- keep in mind, research is a tiny portion of what this government spends, but it`s got huge returns, right?

There`s tons of economic evidence for it.

UNIDENTIFIED FEMALE: (inaudible) the private sector as well.

HAYES: Yes, of course.

BAKER: In terms of research and knowledge, I mean I was listening to your discussion with Paul earlier, and you said, how -- you know, how should people distinguish ...

HAYES: Right.

BAKER: .... Between. And Paul didn`t give the best answer, which he`s given in other times. Much of what, you know, we are arguing over, there are clear predictions.

HAYES: Right.

BAKER: You know, we are supposed to see interest rates go through the roof.

HAYES: Right.

BAKER: We`re supposed to see inflation go through the roof.

HAYES: We are not seeing it.

(CROSSTALK)

HAYES: Yes.

BAKER: I mean, you know ...

HAYES: Yes.

BAKER: We have clear predictions, and pretty much down the line, I think Paul`s been right and the conservatives have been wrong.

HAYES: I want to thank my guests today. Heather McGhee from Demos think tank. Dean Baker from the Center for Economic and Policy Research. Alexis Goldstein from Occupy Wall Street, not from Occucopy. Paul Krugman, author -- Krugman, author of "End This Depression Now", now out in paperback. Thank you all. Thank you for joining us.

We`ll be back next week Saturday and Sunday at 8:00 Eastern time. Coming up next is "Melissa Harris-Perry." On today`s MHP, a preview of the president`s big speech Tuesday night. Do words really matter? Plus, with the Grammies tonight in Los Angeles, dissecting the troubling relationship between two of music`s biggest stars. Chris Brown and Rye Rye (ph). Get ready tonight. You`re going to want (inaudible) on this one. That`s "Melissa Harris-Perry" coming up next. We`ll see you next week here on "UP."

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.END

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